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                                                                                                         Global Research


Macro
Asian Economics                     Ageing Asia
                                    The challenges of a demographic shift
                                     Asia is among the most rapidly ageing regions in the world, led
                                      by Japan, China, Korea, Taiwan, Singapore, and Hong Kong

                                     Even Thailand, Indonesia, and Vietnam are greying rapidly,
                                      with India, the Philippines and Malaysia much less affected

                                     As a result, age-related liabilities will surge, adding strain to
                                      public finances and reducing scope for discretionary spending


                                    It’s happening
                                    It’s easy to shrug it all off as some academic concept. That would be wrong. Demographics are
                                    powerful stuff. And parts of Asia are undergoing an especially big turn. Populations are getting
                                    older. Earlier this year, we discussed the slowdown in the growth of working-age populations,
                                    which already poses upward pressure on wages in several markets and will soon weigh on
                                    growth as well (Frederic Neumann and Tushar Arora, Asia’s shifting demographics, February
                                    2012). Here, we discuss a related theme: the rapid greying of populations. Japan and Europe
16 October 2012                     already highlight the challenges – yet it’s happening even more rapidly in emerging Asia.

Frederic Neumann                    Consider some of the numbers. Over the next 18 years, the number of over 65 year olds in
Economist
                                    Asia will jump from 300 million to 580 million. By 2050, the figure will be almost 1 billion
The Hongkong and Shanghai Banking
Corporation Limited                 – that’s 1 out of 6 people in an estimated 5.4 billion total population. China is among the
+852 2822 4556                      most rapidly ageing countries in the world, greying at almost double the speed of Europe,
fredericneumann@hsbc.com.hk
                                    while the ratio of over 65 year olds in the total population will pull even with that of the US
Julia Wang                          in 2038. As a result, across Asia, dependency ratios will soar, eventually hitting 100% in
Economist
The Hongkong and Shanghai Banking   places like Taiwan, Singapore, Korea, and Hong Kong. Japan will be there already in 2033.
Corporation Limited
+852 2822 4687                      The impact will be profound. For one, ageing populations mean that fewer workers are around,
juliarwang@hsbc.com.hk              slowing growth unless productivity gains can be dramatically increased. In addition, there
View HSBC Global Research at:       is a shift in household spending and savings. People consume the most between the ages of 20
http://www.research.hsbc.com
                                    to 40. Thereafter, they are keener to build a nest egg for retirement. Once they stop working,
                                    they draw down savings. The cost of capital in an economy is thus powerfully influenced by
Issuer of   The Hongkong and
report:     Shanghai Banking        demographics as are spending patterns. Third, older populations add strain to public finances.
            Corporation Limited     Health care and pension costs rise sharply. To finance these, workers face an ever expanding
Disclaimer &                        tax burden to support a growing army of dependents.
Disclosures                         Korea and China face some of the biggest challenges. The IMF, for example, forecasts that
This report must be read            in the next 18 years, age related spending will rise by 7.8% and 4.1 % of GDP, respectively.
with the disclosures and            In both cases, a bigger such increase than for other advanced and emerging markets. The
the analyst certifications in       tracks will need to be laid – fast – to address this challenge.
the Disclosure appendix,
and with the Disclaimer,
which forms part of it
      Macro
      Asian Economics                                                                                                             abc
      16 October 2012




    Chart 1. Percentage of population over age of 65 will double, if not triple, by 2050

      50

      40

      30

      20

      10

       0
              CH         IN   HK    JP     KR      AU      ID     MA       NZ      PH      SG   SL   TH   VN   TW   US W.Europe


                                                           2012     2025        2050

    Source: UNPD, HSBC




Projections, not forecasts
Forecasts, above all economic, are tricky stuff. They are based on assumptions, easily questioned and all too
often proved untenable by ensuing events. Demographics, however, are built on slightly firmer foundations.
The contours of future populations are already visible: birth and mortality rates, along with life expectancy,
are parameters that are largely known. Certainly, these can change, by disease or calamity, or breakthroughs in
medicine and sanitation. But, on the whole, there is far greater certainty attached to demographics than to
other fields. We therefore prefer to call the following numbers projections rather than forecasts. All the more
reason to consider the data in greater detail.

First, and most simply, chart 1 shows the share of people aged 65 or above in the total population. Everywhere
across Asia, except in Australia, New Zealand and Japan, this ratio will double if not triple by 2050. Sure,
38 years is a long way out, but the effects are already felt much earlier. Already by 2025, 13 short years into
the future, the share will rise sharply. Korea, for example, will pull past the United States (where retiring baby
boomers will push up numbers rapidly as well). This ratio is rising fast in Taiwan as well, but also note
the increase in places such as Thailand, and Sri Lanka. In China, meanwhile, the proportion of people of 65
years and older will jump from 9.9% to 15.8% – lower than elsewhere, but still a big rise.

There are, of course, important distinctions. Indonesia and the Philippines, for example, start with a much
younger population. While the number of old people will triple in the Philippines from 4% currently to 13%
in 2050, this is still quite low.

Nevertheless, on a grand scale, the challenge of ageing is shifting to Asia. We have already mentioned that
by 2050 the number of people aged 65 and over will jump from the 300 million currently to 960 million.
45% of them will be in China. The ratio of over 65 year olds to total population will rise from 1:14
currently to 1:6. The over 65 ratio in China is a little over half the US level currently; by 2050 it will
overtake the US. Incidentally, the Chinese population will start to decline in 2035, as will its share of total
population in Asia. India will overtake China as the most populous Asian country by 2022.

Second, the median age will climb swiftly in much of the region. In fact, simply looking at the share of
those aged 65 years and older does not fully capture the pace of ageing in Asia. For example, from 2010
to 2035, the Chinese median age will rise from 35 to 45. True, Europe will reach 45 somewhat earlier, by


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   Macro
   Asian Economics                                                                                                                   abc
   16 October 2012




 Chart 2 : Median age: sharply rising in Asia, and to exceed the US in several countries in the future

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  50

  40

  30

  20

  10

    0
          CH          IN   HK   JP     KR      AU      ID     MA       NZ      PH       SG   SL     TH   VN   TW     US W.Europe


                                                       2010     2025        2050

 Source: UNPD, HSBC




2025. But it will have taken Europe 45 years to travel the same distance that China will have completed in
a mere 25 years.

The smaller countries are ageing even more rapidly. In Taiwan, Singapore, and Korea the median age will rise
by 16 years in less than 4 decades. By 2050, it will be 56 in Taiwan and Japan, 55 in Korea, Hong Kong and
54 in Singapore. In Hong Kong and Singapore this trend may be ameliorated by immigration. But, for various
reasons, this may prove more challenging in Korea and Japan. In comparison to the aged Asian tigers, the
US median age will only be 40 thanks to a higher birth rate.

So where do more old people, and a higher median age, leave us? With lots of people to be looked after.
In other words, dependency ratios – the number of 0-14 plus over 65 year olds to those aged 15-64 – will
rise sharply. Take chart 3. Over the next four decades, dependency ratios will more than double in Hong
Kong, Japan, Korea, Singapore and Taiwan. The ratio will be higher than 1:1 in Hong Kong, Japan, Korea
and Singapore. Bear in mind, however, that in many emerging market, including in China, retirement
comes earlier than 65. So our numbers are conservative and likely underestimate the burden of old age for
some countries, unless, of course, retirement ages are raised.


 Chart 3: High dependency ratios: a much heavier burden on the working population (0-14 and 65+ year olds as % of 15-64 year olds)

  140
  120
  100
   80
   60
   40
   20
     0
           CH         IN   HK    JP     KR     AU       ID    MA       NZ          PH   SG   SL     TH   VN   TW     US W.Europe


                                                      2012     2025     2050

 Source: UNPD, HSBC




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      Macro
      Asian Economics                                                                                                                                                      abc
      16 October 2012




    Chart 4: Age related spending - a future liability that cannot be ignored (current expenditure)

       10

        8

        6

        4

        2

        0
                CH        IN        HK        JP       KR        AU         ID      MA         NZ       PH        SG        SL        TH         VN   TW     US W.Europe


                                           Healthcare as % GDP              Old age social security spending as % GDP

    Source: ILO, World Bank, National Accounts, HSBC NB: For Indonesia and Singapore, the number is total social security spending as % of GDP




So what does it all mean?
In the February report, we already talked about the risk that GDP growth rates will slow down along with
working population growth rates. Aging also means lower saving levels as old people tend to draw down on
income accumulated during their working life. From the median age analysis, it is also evident that
consumption patterns in Asia will be driven by the needs of aging – good news for healthcare providers.

For governments in the region, however, ageing means a looming, aged-related liability. Currently, the
region vastly under-spends on age-related social security and healthcare compared to developed markets,
reflecting the relatively young populations and less comprehensive social safety nets (see chart 4). This is
a handy saving that allows governments to prioritize other types of spending, such as infrastructure.

However this advantage will disappear quickly. Take Korea, which according to our analysis is one of the
Asian economies most at risk from demographic shifts. The IMF projects Korea’s public pension expenditure
to increase from 1.7% of GDP in 2011 to 12.5% in 2050, when the dependency ratio reaches 108% and those
aged over 65 years make up 40% of the total population (see chart 5).



    Chart 5: Pension liabilities set to increase quickly in Korea

      120                                                                                                                                                            14

      100                                                                                                                                                            12
                                                                                                                                                                     10
        80
                                                                                                                                                                     8
        60
                                                                                                                                                                     6
        40
                                                                                                                                                                     4
        20                                                                                                                                                           2
         0                                                                                                                                                           0
                           2010                            2020                            2030                            2040                       2050

                                              Pension cost projection (%GDP, RHS)                         Dependency ratio (%, LHS)

    Source: IMF, HSBC




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   Macro
   Asian Economics                                                                                                                           abc
   16 October 2012




 Chart 6: Percentage of working population currently covered by pension programs (effective coverage)

 120

 100

  80

  60

  40

  20

      0
            CH         IN        HK          JP        KR         AU        ID     MA        PH    SL   TH   VN        US    GER W.Europe
                                                                         Pension cov erage %

 Source: ILO, OECD, HSBC



In most Asian economies, pension coverage ratios are still low. This suggests that most governments have
not yet adequately prepared for the rising tide of retirees in the coming years. For example, pension coverage is
92% in Western Europe, but only 30% in China and 20% in Thailand. This will need to rise, and quite quickly
at that, to account for the swift pace with which populations are ageing in Asia. Some governments are
already starting work on this, most notably China. But, as chart 6 shows, there is still a long way to go. If
coverage is expanded, this will likely push up wage costs still further. If coverage is not expanded,
governments will suddenly be saddled with huge liabilities that are inadequately provisioned for.

The IMF has published estimates for age related spending increases through 2030 for a number of Asian
economies. To be sure, in most cases, these pale in comparison to those needed in the US and other advanced
markets. Still, in the case of China, Malaysia, and Thailand, they are considerable. What’s more, the real
kick will likely come between 2030 and 2050 for most economies as the pace of ageing accelerates quite
sharply. The effects, however, will be felt much earlier. Governments will need to provision early, leaving
but one path to maintain the region’s soaring growth rates: the future hinges on boosting productivity.


 Chart 7: Burden of age-related spending to increase over next 18 years (% of GDP)

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  8

  6

  4

  2

  0
           CH               IN         ID           MA            PH          TH        JP        KR    AU        NZ        US   Adv anced
                                                                                                                                   (av g)

                                                             Adjusted needed by 2030 (%GDP)

 Source: IMF,HSBC NB: advanced refers to average of advanced economies




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      Macro
      Asian Economics                                                                                  abc
      16 October 2012




    Chart 8: Projected pension costs (share of GDP)

    14

    12

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     6

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             CH         KR       JP        AU         NZ      IN        ID   MA   PH   TH   GER   US

                                                       2010   2030   2050

    Source: IMF, HSBC




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    Macro
    Asian Economics                                                                                            abc
    16 October 2012




Disclosure appendix
Analyst Certification
The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that the
opinion(s) on the subject security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their
personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific
recommendation(s) or views contained in this research report: Frederic Neumann and Julia Wang

Important Disclosures
This document has been prepared and is being distributed by the Research Department of HSBC and is intended solely for the
clients of HSBC and is not for publication to other persons, whether through the press or by other means.

This document is for information purposes only and it should not be regarded as an offer to sell or as a solicitation of an offer
to buy the securities or other investment products mentioned in it and/or to participate in any trading strategy. Advice in this
document is general and should not be construed as personal advice, given it has been prepared without taking account of the
objectives, financial situation or needs of any particular investor. Accordingly, investors should, before acting on the advice,
consider the appropriateness of the advice, having regard to their objectives, financial situation and needs. If necessary, seek
professional investment and tax advice.

Certain investment products mentioned in this document may not be eligible for sale in some states or countries, and they may
not be suitable for all types of investors. Investors should consult with their HSBC representative regarding the suitability of
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situation or particular needs before making a commitment to purchase investment products.

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Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment
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For disclosures in respect of any company mentioned in this report, please see the most recently published report on that
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Additional disclosures
1    This report is dated as at 16 October 2012.
2    All market data included in this report are dated as at close 16 October 2012, unless otherwise indicated in the report.
3    HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its
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                                                                                                                                   7
    Macro
    Asian Economics                                                                                                                     abc
    16 October 2012




Disclaimer
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